“Hedge Funds are at the forefront of innovation and flexibility.“
Panayiotis Lambropoulos, CFA, CAIA, FRM is a Portfolio Manager at the Employees Retirement System of Texas, a $28 billion retirement plan located in Austin, Texas. His responsibilities include sourcing, analyzing and evaluating potential third party managers deploying all types of alternative investment strategies.
“There is a lot of diversification and dispersion going on beneath the surface of the S&P 500.” This should benefit active managers and active hedge funds. Although passive management is getting attention, the recent rebound in the S&P is due to 4-5 stocks, which account for a quarter of the rally. More than 50% of the S&P is trading below its all-time highs.
Panayiotis finds Hedge Funds attractive because they provide risk diversification and downside protection. They are able to generate different sources of returns as a result of their adaptability with low beta.
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SPEAKER
Panayiotis Lambropoulos
Portfolio Manager
Employees Retirement System of Texas (ERS)
MODERATOR
Anthony Scaramucci
Founder & Managing Partner
SkyBridge
EPISODE TRANSCRIPT
John Darsie: (00:08)
Hello everyone. Welcome back to SALT Talks. My name is John Darsie. I'm the Managing Director of SALT, which is a global thought leadership forum at the intersection of finance, technology and public policy. SALT Talks are a series of digital interviews that we launched during this work from home period that provide conversations with leading investors, creators and thinkers.
John Darsie: (00:28)
What we're really trying to do during these SALT Talks is replicate the experience that we provide at our SALT Conference series. What we're doing there is really providing a window into the minds of subject matter experts and providing a platform to what we think are interesting and world changing ideas.
John Darsie: (00:43)
And today, we're very excited to welcome Panayiotis Lambropoulos to SALT Talks. Panayiotis is the Portfolio Manager for Hedge Funds at the Employees' Retirement System of Texas which is a $26 billion retirement plan located in Austin, Texas, the capital. His responsibilities including sourcing, analyzing and evaluating potential hedge fund managers, process and performance assessment, interviewing various fund employees and third party service providers and maintaining the due diligence efforts.
John Darsie: (01:12)
Panayiotis started in the alternative investment industry as a research analyst at Grosvenor Capital Management in Chicago. He later joined MCP Alternative Asset Management, a $6 billion Tokyo headquartered fund of funds and while he was working for that fund, he was actually still based in Chicago.
John Darsie: (01:29)
Panayiotis holds a BS in Business Administration with a concentration in finance and marketing from Boston College and an MBA in General Management from North Western University's Kellogg School of Management. So, as you can see, despite now living in Austin, Texas, he's very steeped in Chicago culture.
John Darsie: (01:46)
Panayiotis has earned his Chartered Alternate Investment Analyst designation, CAIA; Financial Risk Manager designation as well as the Chartered Financial Analyst Designation, the CFA.
John Darsie: (01:58)
And just a reminder for our audience during today's talk, if you have a question for Panayiotis, you can enter it in the Q and A box at the bottom of your video screen. And hosting today's interview is Anthony Scaramucci, the founding and Managing Partner of Skybridge Capital, a global alternative investment firm. And Anthony is also the Chairman of SALT. And with that, I'll turn it over to Anthony for the interview.
Anthony Scaramucci: (02:17)
John, thank you. And I'm sure, Panayiotis, you'll love the way he pronounces your name. He's been working on that for the last month. So congratulations to you Darsie. That was well done.
John Darsie: (02:28)
Thanks.
Anthony Scaramucci: (02:28)
But I want to go to your personal background. How did you, we all have our different odysseys, to use a Greek expression. How did you get to Texas ERS? What got you thinking that that was the direction you wanted to take the career in?
Panayiotis Lambropoulos: (02:49)
Well first of all, thank you for inviting me in being part of this talk series and, given the pandemic and the times that we live in, I hope everybody's well on your side. Yeah, my arrival here is part life, part luck, part choices as is anything else with life. My personal background actually starts, if you want to start at the beginning of the odyssey, starts in Greece. I was born and raised in Greece. I was there until I was 13 years old.
Anthony Scaramucci: (03:18)
In Athens? Which area-
Panayiotis Lambropoulos: (03:20)
In Athens.
Anthony Scaramucci: (03:20)
In Athens, okay.
Panayiotis Lambropoulos: (03:21)
I was in Athens.
Anthony Scaramucci: (03:22)
Beautiful city.
Panayiotis Lambropoulos: (03:23)
Yeah, five minutes outside of downtown. And life kind of came at me unexpectedly. I lost my father when I was 13 years old. A family decision was to move to America. My mother's family was in Massachusets, hence my connection to Massachusets and Boston College. But I've always wanted to be in finance and investments and-
Anthony Scaramucci: (03:45)
Where did you move to, if you don't mind me asking? What part-
Panayiotis Lambropoulos: (03:47)
Central Massachusets, just north of Western Mass.
Anthony Scaramucci: (03:51)
Okay. Sure.
Panayiotis Lambropoulos: (03:51)
60 miles west of Boston.
Anthony Scaramucci: (03:53)
Yep.
Panayiotis Lambropoulos: (03:54)
Finished high school there as John alluded to. I did my undergrad at Boston College. Did a couple of years of accounting. Wasn't really my long term interest. Investments always was my real interest and passion and that interest actually was born from my grandmother who turned 100 last year-
Anthony Scaramucci: (04:15)
Wow. Congratulations.
Panayiotis Lambropoulos: (04:16)
Still with us. And she obviously, as you can guess, based on her age, she has seen a few things in her life. And the first thing she taught me was the power of compounding and saving. And when I arrived in the States, it was the advent period of mutual funds and markets were changing, so that's when my curiosity for investment really began. And through a friend, I ended up in Chicago, Grosvenor Capital Management was my foray into the alternative investment world back in 2000. That's where I got my start in this nuanced and new vehicle called hedge funds. I had no idea what it was but sounded interesting and different.
Panayiotis Lambropoulos: (04:58)
And to date myself, prior to my first interview, I ran down to a Borders, picked up whatever few books were available back then about hedge funds, just to prep myself a little bit for the interview. Luckily, they believed that the lights were on and somebody was home upstairs and I could pick up stuff quickly.
Panayiotis Lambropoulos: (05:17)
From there, as they say, the rest is somewhat history. Stayed in Chicago for 15 years. The big change from my time in Chicago was the financial crisis and the tsunami in Japan actually affected my life. MCP's business model is that to cater only to Japanese financial institutions and, in combination with the financial crisis and exposure to the tsunami that happened in Japan, there was a retrenchment in the company, there was a retrenchment in the industry. But I wanted to stay in the industry. I love this industry. I'm very passionate about it. And I ran across this growth here in Austin and the growth in the public sector. And my idea was that I could take my experience, hit the ground running, contribute to small teams right away; at the same time to learn and build on my investment acumen, my personal growth. And that's what kind of brought me here to Austin as they were building a new program.
Anthony Scaramucci: (06:19)
Your foray into hedge funds. Let me, because I'm face with this dilemma every single day. Why hedge funds? Active management, passive management, yea, why hedge funds Panayiotis?
Panayiotis Lambropoulos: (06:35)
The value-
Anthony Scaramucci: (06:37)
Make the case for me and then obviously John as he's making the case, please record it two times and so this way we can give it to our sales force. Go ahead, make the case.
Panayiotis Lambropoulos: (06:46)
Well, in terms of hedge funds themselves, the overall how we view hedge funds here at ERS, we believe that it can be utilized to protect and preserve investment capital, provide risk diversification and provide that downside protection that everybody talks about; downside protection that became valuable this past February and March. And hedge funds overall, we think of as businesses as investment conduits, not as strategies. And so we're talking about individuals that are able to take advantage of massive dislocations and the accompanied volatility and uncertainty that comes up with those massive dislocations.
Panayiotis Lambropoulos: (07:29)
The other thing I would say about hedge funds is that, and [inaudible 00:07:34] enough do about this, is they're always in the forefront of innovation and flexibility. Markets change, investment opportunities change and hedge funds offer that opportunity to generate a different source of returns by having that flexibility and innovation on their side.
Panayiotis Lambropoulos: (07:51)
At the end of the day, what we really focus on, for example, is a clear purpose, an expectation of what hedge funds are intended to do within our portfolio. That sends to the foundation of whether or not we are successful or not, how we measure success. If you enter into a hedge fund saying, well, I just want high returns or I want a hedge fund that always beats the S&P, more often than not, investors will be disappointed.
Panayiotis Lambropoulos: (08:19)
First of all, the word hedge is in hedge funds. Unless you're 100% at long, you're not going to keep up with those returns. So for us, we set a purpose and expectation of what is it we want this tool, in our overall toolbox, to do for us and do we succeed. For example, in our absolute return portfolio, one measure of success is whether or not it truly provides diversification to the rest of the trust. We have quantified that success by targeting a beta of 0.4 or less for our portfolio to the rest of the trust. Inception to date, which is almost eight years now, we have succeeded. Why? Because our data is less than 0.4. Are we targeting returns? Yes. Just like everybody else. And we have met those returns. But the primary purpose has been met. And that's how we measure success. And anecdotally, that success was met in March. So that's one way to measure success; what is the success, what is the purpose, what is it that you want to do.
Panayiotis Lambropoulos: (09:26)
In terms of active versus passive, obviously the last 10 years have been unusual and since the great financial crisis, I think that you have to figure out what is it that's been present in his worK or not for his active or passive [inaudible 00:09:43]. So, for example, since the financial crisis we have definitely seen managers being challenged by the fight that we've had a higher concentration of opportunities. Less number of opportunities, higher capital changing the same number of opportunities. At first glance, you may say that the recent rebound in the S&P from the March lows is probably the same issue. We are driven by five or six stocks, at most two sectors, and anecdotally we can see other data that lead us to believe that this is a very thinly traded breadth type of recovery.
Panayiotis Lambropoulos: (10:23)
But, there's a lot going on below the surface. The five or six stocks are only the tip of the iceberg. If you look below the surface and under the water. For example, we see that almost a fifth of the S&P companies are now trading more than 50% below their all time highs. The average stock in the S&P index is about 30% below its peak. Three out of the 11 sectors in S&P are in the green; the rest are in the red. And as I mentioned, about five of the largest stocks that are driving this recovery account for a quarter of the rally since the March lows. And those five stocks, in aggregate, have close to a $7 trillion market cap, which is larger than the Japanese TOPIX index. So there's a lot of diversification dispersion going below the surface which should benefit active management and active hedge funds. We saw high pairwise correlation since the financial crisis that seems to be reverting itself. Again, a lot going on below the surface if you're just looking at equities.
Panayiotis Lambropoulos: (11:31)
The same story could probably be said about the credit market as well. So, overall, and the last thing I'd probably mention is momentum. We've seen growth factor outperform value for the better part of the last 10 years. Now we've seen a reversal and whether you believe we're coming out of the current recession or eventually we're going to grow out of it, or perhaps fall in a double dip recession, value factor, which tends to be a contrarian play, should outperform growth.
Panayiotis Lambropoulos: (11:58)
So there's a lot going on here in terms of dispersion, in volatility and uncertainty that should benefit hedge fund strategies.
Anthony Scaramucci: (12:07)
So, listen, that's music to my ears. And I totally agree with you, particularly with the concentration level. We've both been doing this a long time. What do you think happens to those five stocks, even if the fundamentals of something that's trading at 170 times earnings are strong, isn't it possible that you could see multiple compression and have a stock trade to 80 times earnings and still be growing at 15 to 30% but lose half your money?
Panayiotis Lambropoulos: (12:36)
Before I address that question, to tie the knot about the active versus passive argument. At alpha and beta, because that's what, at the end of the day, what we're really talking about, in my opinion, they're often spoken, or too often spoken in absolute terms. It's either one or the other. First, I think there's room for both and you can allocate to both types of factors, but more importantly I think, I think of alpha and beta as bookends. I don't think of them as absolute terms. And what I mean is, if you have beta on one end and alpha on the other, you have a spectrum of other strategies that could benefit. It's not easy to quantify alpha in main point.
Panayiotis Lambropoulos: (13:15)
So, given where we are right now in the cycle, for example, we might anticipate that distressed investing should do well a year or two or three years from now. Distressed investing, I think, is a form of alpha. You need a good team to source, a good team to work out these opportunities. It's not easy to generate the alpha. But it is a form of alpha that should be accounted for in your portfolio.
Panayiotis Lambropoulos: (13:41)
So that's another argument for active and alpha [crosstalk 00:13:44].
Anthony Scaramucci: (13:45)
It's well said. And we know, the passive for the cycle, we know that that trade is very, very crowded. It's the S&P five. And as you're pointing out, it's the S&P 495. And so what do you think happens there?
Panayiotis Lambropoulos: (14:02)
So I think at the moment, in conjunction with that, there's a lot of conversation about valuations and there is definitely bifurcation between the financial market and economic reality. Whether it's the stock market and the real economy. There's definitely a bifurcation between the two. And right now, what I would probably do is to separate first and foremost the market between technicals and fundamentals. At the time, I think at the moment, technicals are definitely outwinning fundamentals, in serving as heavy tailwinds for the current market. And part of the technicals I would allude to or point out to are first of all, M2. Money supply provided by the Fed. If you overlay the current Fed M2 Saint Louis Central and Bay graph with the S&P, it's a one for one relationship. The other favorite acronym, TINA. There's an alternative. We have lower rates and investors need yield, they need returns, by default, they're looking for a more return seeking assets, like stocks.
Anthony Scaramucci: (15:16)
Sure.
Panayiotis Lambropoulos: (15:16)
We have FOMO. Right now, we have at the lowest percentage of shares outstanding being short in the last 20 years. Even the most bearish of skeptical investors have to turn bullish so they're not being overrun in their short book.
Panayiotis Lambropoulos: (15:33)
And so, the technicals, I think are definitely overwhelming. On the fundamental side, price seems to definitely have run up ahead of earnings. The question is, at this moment in time, how much have been priced in, looking ahead, and what type of key assumptions are anybody on a fundamental case is making about COVID, about earnings growth, about unemployment rates, about GDP growth. It seems like a perfect storm of normalizations has to come in play in order for everything to work out and justify the current fundamentals and valuations.
Panayiotis Lambropoulos: (16:16)
What I would say though is, two things. One, the valuations that we're alluded to again is concentrated to one part of the market. It's close to $5 trillion of cash, sitting on the side. We could see a rotation once we get more validity of some type of recovery and stability in the market, so that cash could find its way in other parts of the market, again perhaps cheaper parts of the market, sectors that haven't participated in this recovery or rally.
Panayiotis Lambropoulos: (16:45)
The other point I want to make is, although we're making the argument that the market is perhaps frothy or expensive; we have been in` a new regime of rates in the last 10 years and we're most likely going to remain in the same regime for the next 10 years. Unless we have unexpected, unforeseen spike in inflation. So if we're looking at a valuation matrix of any choice, compared to a historical mean, I could argue that, given the new regime and lower discount rates, that mean eventually will have to come up. And so whatever absolute valuation you're looking at, to the new mean that should come up, the market is probably not as expensive as you may think. If participants think that the market is 15/20% overvalued based on a valuation matrix, I could argue it's probably far less, maybe five to 10 range. So it may be not be as extreme as we thought.
Anthony Scaramucci: (17:41)
It all makes sense. John is chomping at the bit here to ask questions. We're getting a lot of audience participation and so I'm going to turn it over to John in a second. And everything you're saying makes great sense. But I want to go to an area of the market that was an epicenter of the March sell-off, which was the structured credit area of the market which has been a little bit of a recovery. Do you have an opinion on structured credit, one way or the other?
Panayiotis Lambropoulos: (18:10)
We have an internal team that focuses on structured credit, internal credit. We were quick to put some capital to work. As you alluded to, we saw the big sell-off in March. Within structured credit, we haven't seen a rebound but there has only been a rebound in the AA, AA. The lower credit rating hasn't recovered as fast, so there might be still opportunity there. The problem has been the Fed. The Fed has acted as a backstop to a lot of the credit migration that we thought we were going to see and the CCC buckets were most likely going to violate a lot of their interest coverage or OC coverage and that's what we were expecting. But for the time being, the Fed has acted as a backstop. The only thing the Fed had to do was announce its intention of getting involved in the market and we saw a rebound. It hasn't even put to use all of the capital it announced for various programs.
Panayiotis Lambropoulos: (19:08)
And so, I think there still needs to play out. We're keeping an eye on it. Other than the early buying opportunity that we saw in March, we haven't put yet additional capital to work. We've seen some rebound but we're in the wait and see mode.
Anthony Scaramucci: (19:25)
And why do you think the Fed hasn't really, they obviously focused or at least directed attention to high yield and they did direct some attention to investment grade, but why do you think they've laid off of most of structured credit except for the new issue market that's AAA rated?
Panayiotis Lambropoulos: (19:43)
It's hard to say. I think, overall, the Fed's intention was to stabilize the market, provide liquidity, take advantage of the lessons learned from OA and make sure we didn't have a liquidity problem that turned into a solvency problem. And so I think they wanted to bookend the market to provide some comfort that at least the market would function, companies would have access to capital, and at the very least, again, not that I completely agree, but by that technical backstop, at least for investors not to start tricking out paper simply because they had to keep up with indices or they were violating any credit rating allocations that they had in their portfolio. And so, in a way, we migrated from you're too big to fail to nobody's allowed to fail. That's I think the big difference that we've seen in the last 10 years.
Anthony Scaramucci: (20:35)
Yeah, it'd make sense. We're in very different territory than the market that you and I grew up in where the Fed had a light touch and they did some monetary policy lightly and they did some currency intervention but now we seem to have a very big macro-trader in the market, known as the Federal Reserve, frankly the global central banking system.
Anthony Scaramucci: (21:00)
But John, I know wants to ask some questions, so please interject John. I know you've got some-
John Darsie: (21:05)
Anthony, just because Panayiotis has a very distinguished beard during the work from home period doesn't mean he's as old as you. He just doesn't use the same type of hair dye.
Anthony Scaramucci: (21:17)
First of all, it's not quite hair dye. It's shoe polish. And I can send you a case of it any time you want. And I would recommend when you get to be our age, you don't want to have a lot of snow on the roof, okay. And right now, you look like you've got a lot of snow in the basement there. We can talk [crosstalk 00:21:35] when this is over. See, he always comes in and tries to give me a karate chop to the Adams apple. See that?
John Darsie: (21:41)
Have to keep him honest. So we talked about structured credit Panayiotis, but I want to talk about more broadly the hedge fund space. Obviously there's a lot of technical dislocations in March in response to the pandemic and the economic fallout from the pandemic. What asset classes to you became most attractive during that period? What asset classes within the hedge fund space still look attractive? And what are others that you think'll be more challenging in the near term as we try to rebound from all the effects of the pandemic.
Panayiotis Lambropoulos: (22:12)
So, really quickly, on the liquid space, one area that we might begin looking at and it may sound a bit contrarian, might be the equity long short space. The one argument is the one I've just made in terms of increased dispersion despite the massive run up in the markets. The other argument is that whether you believe we're headed into a double dip recession or that we might eventually be part of the next economic cycle. Either way, again, we'll either see dispersion or we may see a rotation in the market. We may see value overtaking growth. There should be a lot of activity within the equity long short space.
John Darsie: (22:52)
The latest letter that they're describing the recovery with is a K shape recovery. So that sort of fits with your theme of dispersions. There's going to be winners and there's going to be losers. You just have to find talented managers that are able to pick those out?
Panayiotis Lambropoulos: (23:05)
Correct. And obviously there's a big challenge again on that side will be the short side. But we believe eventually that we may be able to find those managers that have that long history, sustainable history and persistent history. Given the anticipated choppiness of the market, I know it's been mono-directional essentially since the March lows, but we do anticipate choppiness and increased volatility. I think we're seeing signs of it now. We have seen the massive V shape bounds, albeit of extreme lows, you would expect that. But we're starting to see a sideways movement in the market as unemployment benefits are now on the wayside as more uncertainty continues with whether or not there'll be more hotspots, how long it's going to take for some type of medical solution for COVID.
Panayiotis Lambropoulos: (23:57)
Again, that should increase uncertainty and volatility so relative value strategies and global macro-strategies should benefit from that type of environment, especially our discretionary lower macro. But again, the Fed is the big elephant in the room. And our discretionary global macro has been fighting that headwind for 10 years and that will be, again, the big challenge.
Panayiotis Lambropoulos: (24:19)
On a less liquid side, we have an opportunistic credit portfolio and we are taking a look there within longer term, we're going to look at the stress. But we're also looking at some niche opportunities like bank risk sharing and bank regulatory capital sharing. Compared to OA, financials are not the epicenter of the problems that we have today. Conversely, banks will be expected to be liquidity providers and help in the economic recovery. The market itself, the BRS market has grown. The latest 2019 figures show that it's up to $100 billion or so.
Panayiotis Lambropoulos: (24:59)
And so we believe that that will be an interesting strategy. It's a strategy that we've had some exposure to. We're looking to perhaps increase that exposure in terms of a strategy. And we are looking, potentially at distress down the road. In the immediate future, the one area that I believe might offer an interesting opportunity is direct lending, but not in a good way. Following the financial crisis, we saw, partly because of the [inaudible 00:25:27] rule, partly because of the economy, a new market being created, a new vacuum coming in to provide that credit which was direct lending.
Panayiotis Lambropoulos: (25:34)
And we've seen unprecedented growth in the last 10 years for that market. The problem is, it's a market that hadn't been really tested. And one thing that we saw, there's obviously a lot of money being put to work, raised and put to work right away. And I think this type of a market environment is going to show the true underwriting skills, the true ability for our teams that should be in the direct lending market, those that shouldn't have been in the direct lending market. And one area of concern is that we're not seeing in docs right now, one area that a lot of our managers pointed out, is the lack of maintenance coverage within the underwriting standards.
Panayiotis Lambropoulos: (26:15)
And so it's a bit of reap or rhyme if you will with the subprime trade of 06/07. It maybe take a different turn this time around. But we may have a secondary distress to direct lending market to take a look at. And I thought that would always be something interesting to look at.
John Darsie: (26:36)
If you wait long enough, everything becomes an opportunity, right.
John Darsie: (26:40)
So you spent almost your entire career in the hedge fund space evaluating other managers in a multi-manager type of format. When you're evaluating potential investments in hedge funds or other alternative funds, what type of organizational characteristics do you look for and personal characteristics do you look for in the investment team?
Panayiotis Lambropoulos: (26:58)
First and foremost, it starts whether it's our absolute return program or merger manager program that we revamped a couple of years ago. It starts with the philosophy that we're looking at businesses and not funds. You always want to think of it that way, whether they're managing a portfolio or building a widget. Doesn't matter. You think of it as a business first. Given who we are, who we serve, the amount of capital we're putting to work. We need to partner with institutional caliber type firms.
Panayiotis Lambropoulos: (27:27)
Obviously from an investment or operational due diligence point of view, we look at qualitative and quantitative factors just like everybody else. On the quantitative side, we'll look at various sources of return, key periods of performance, both good or bad. It's not simply about the quantity of returns but we want to assess the quality of returns as well. And we overlay that performance with key investment or risk management decisions and opportunity sets.
Panayiotis Lambropoulos: (27:54)
On the quality side, obviously we want to look at the quality of experience of team members, honesty, that's obviously much more important post-Madoff. We want to get an inside look in a roadmap of the thought and the process. It's not always about the answers you get. But it's also about how somebody gets to those answers. And that's something I really pay attention to.
Panayiotis Lambropoulos: (28:17)
And obviously culture and opportunity. The goal of our process is to try and tie performance or statistics back to the stated strategy, the risk constraints and the opportunity set. At the end of the day, are they doing what they said they were going to do.
Panayiotis Lambropoulos: (28:35)
At a high level, that translates to probably two words that come to mind. Consistency and adaptability or flexibility. We want to see consistency in thought process, the investment decision making process, risk management and the team itself. We want to examine the throughput, not just the output. And in terms of flexibility, I'm not talking about strategy drift, but somebody that's able to adapt to new market conditions, opportunities, new tools that become available to them.
Panayiotis Lambropoulos: (29:06)
At the below level, at the PM or team level, some characteristics that I think make investment hedge fund managers or investors are rather simple. The desire to succeed or build something that matters to them and their team or their legacy. The ability to communicate, both internally and externally to key stakeholders. The drive to be better and do better every day, driven by strong analytical skills.
Panayiotis Lambropoulos: (29:32)
High emotional IQ. You need to have no fear in making decisions, making investment decisions, taking those risks. The ability to listen and put together a lot of information from various sources and come together with some type of outlook. And the self-awareness, to be aware of your strengths and exploit those strengths, but also mitigate your weaknesses or work on your blind spots.
Panayiotis Lambropoulos: (29:58)
At the end of the day, what is due diligence? We want to make sure that the foundations that made a successful hedge fund in the past are present today to give us and them the ability or higher probability than not, to be successful in the future.
John Darsie: (30:15)
Yeah. I think at Skybridge, that's something that we certainly concentrate on as well. I think the post-2008/9 period there were a lot of investment managers, to use a Greek word that were apotheosized, where people were assigned genius to them because of bets they made as a result of the crisis, but haven't necessarily performed in the 11 years after that. It's very important to continue to drill down on consistency of process and adaptability to different market conditions like you mentioned.
John Darsie: (30:42)
In your emerging manager program like you mentioned, why is it important to you guys to have an emerging manager program? What do you look for in emerging managers and what advice would you give to managers that are starting out that are looking to distinguish themselves and bring that institutional quality process to their investment team?
Panayiotis Lambropoulos: (31:02)
So the thesis to start or revamp our investment emerging manager program was actually twofold. One, as Anthony alluded to, we've been doing this for a while. We've seen a lot of names come and go. We know who the names are. But I thought that we were reaching an inflection point of what I call a generational gap. We start seeing a lot of the successful managers of yesterday either shutting down, retiring, turning their businesses into family offices. So there had to be a transition, a passing of the baton if you will of that next generation. I thought it was becoming increasing in terms of its infrequency. So we wanted to take advantage of the fact that we wanted to find the future manager that is going to be successful, earlier and today.
Panayiotis Lambropoulos: (31:51)
The second part of this thesis was, and this was pre-pandemic, capital raising environment was extremely challenging. And so if we were in a position to provide that capital and be that liquidity provider, we could come from a position of strength and leverage in terms of what type of terms and conditions we could ask for, what type of inside look we could get from the manager themselves.
Panayiotis Lambropoulos: (32:16)
Third, given the amount of capital we're going to put to work, we thought that if we could establish a relationship very early on, then we could get an inside look of what their strengths and weaknesses are, we can then, down the road, perhaps form or put together some type of solution based product that builds upon that strength to either take advantage of that to solve a problem for us, the trust, or offer them the market in general.
Panayiotis Lambropoulos: (32:45)
So that was kind of the general thesis about three or four years ago when we kind of started this process. And we announced the partnership with PAAMCO Prisma in June of '18. We also wanted to offer the market a unique structure that was a little bit different from other seeders. We believe we have achieved that in the form of the fact that ERS is willing to invest in the co-mingle structure in order to build a new or upon existing track record. By agreement and by definition of the business model, PAAMCO Prisma will invest side by side with ERS, will match minimum dollar for dollar what we're willing to put into work and it will do so through the SMA. We get the transparency of that account, because PAAMCO shares that transparency. We negotiate our own terms and conditions but we also offer and ask for operational and financially focused parachutes, if you will, to protect ourselves, which collapse to those of PAAMCO.
Panayiotis Lambropoulos: (33:46)
So in a way, for ERS, we've created, if you will, a synthetic SMA, without having to open SMA. We get the benefits of SMA without having to open and SMA. So that was the idea. That was the execution. And at the end of the day, what we're trying to do is create a farm system for ERS. We're looking at each individual strategy on a standalone basis; we're looking at each manager on a standalone basis. And the idea and the hope is that if this manager is successful, we will put them either in our absolute return portfolio or find a home for them somewhere else within the trust, as long as they're bringing some type of skillset, some type of exposure that we can't replicate in-house and that will be their value proposition to the trust.
John Darsie: (34:32)
That's fascinating. Again, I have some echos to the way we tried to build a farm system at Skybridge as well, because you never know when you're going to need to call on certain strategies or funds with certain profiles to exploit an opportunity set that presents itself in the case of a surprise pandemic.
Anthony Scaramucci: (34:47)
Let me interrupt for a second because I'm very curious as to how these guys think about the pandemic and the impact that it's having on their investment strategy and the long term prospects for the US economy. What are your thoughts there with your economic team?
Panayiotis Lambropoulos: (35:02)
In terms of the pandemic?
Anthony Scaramucci: (35:03)
Yeah.
Panayiotis Lambropoulos: (35:05)
We don't have necessarily economists in house. Obviously each team has its own view. We talk, obviously to a lot of managers and [inaudible 00:35:17] to gauge what the general consensus is. Obviously there's still a lot of uncertainty. I think the markets, by the hour, by the day, sway between hope that a new vaccine is on the horizon, that a new vaccine was announced in terms of what stage it's in, or a new technique to deal with a lot of the symptoms. And then will we trace back to some type of uncertain despair if that hope turns to be untrue or misguided or misrepresented.
Panayiotis Lambropoulos: (35:47)
At the end of the day, the big unknown is when some type of medical safety net is going to be provided. That's what we're all waiting for. And assuming we get there within six, 12, 18 months from now, I think the bigger question is well, what paradigm shift have we all witnessed at once and which paradigm shift becomes temporary and which becomes permanent. And the big question is the consumer. How will they change their behavior? How will their spending change? Is it going to normalize? It is going to take some time to go back to normal? Airlines could open all they want, but if you and I don't feel safe getting on the plane, it doesn't matter.
Panayiotis Lambropoulos: (36:28)
And so, that's how we're taking it very cautiously that there is a lot of noise, the signal noise ratio is high and we're taking it very slowly. We're trying to adjust our due diligence process just like everybody else and thinking about the long term. But the economic uncertainty is still there. But at the end of the day, we are long term investors. That's why we have an IPS in place. We're sticking to it. We're not trying to panic. And we're taking it week by week, month to month, as the new information becomes available. But as long as we stick to the IPS, I think you should be fine.
Anthony Scaramucci: (37:06)
Absolutely great advice.
John Darsie: (37:08)
And in terms of the pandemic, before we let you go, you haven't lived through quite as many financial crises as Anthony, but how do you think the aftermath of this crisis plays out over the next five to 10 years in the hedge fund industry. You've commented on that a little bit earlier in the context of your response regarding active and passive management, but if we look out five to 10 years, what do you think the landscape is in terms of the hedge fund industry is in the wake of this pandemic?
Anthony Scaramucci: (37:32)
Before you answer that, come on, that was an ageist shot at me from a Millennial. So, the two of you are going to take me in basketball when this is over. Okay, we'll see how that goes.
Panayiotis Lambropoulos: (37:44)
[crosstalk 00:37:44] his boss. Most unheard of.
Anthony Scaramucci: (37:48)
Oh my God. All right. Go ahead. Answer the question.
Panayiotis Lambropoulos: (37:53)
If it had to vision about the industry, first of all, I think the AUM we're roughly $3 trillion and that's been stalling and has plateaued in the last couple of years. I think assets under management I think are actually going to increase. I think that alternatives in hedge funds are going to be able to offer a different source and a different type of return, again, most likely would be lower yielding environment and a lot of liability driven or liability based portfolios are going to struggle to meet those targeted returns that are still somewhere in the area of 6.5/7%. Unless, we either concentrate a portfolio or you lever up. The math is very simple.
Panayiotis Lambropoulos: (38:37)
And so I think alternatives will, again, prove their value and assets will increase. I think the number of hedge funds that are out there will shrink as I think they should. I don't think there're truly eight, nine, 10,000 hedge funds out there. I think if we were to take an honest look at what makes a hedge fund, we're probably in the area of 1,000. And if we really filter in terms of quality, we're probably far less than that.
Panayiotis Lambropoulos: (39:01)
And so I think the number of hedge funds will probably decrease as it should and we might see actually more consolidation in the industry of hedge funds and firms coming down within a greater umbrella, for greater economies of scale, greater opportunity to offer variety of solution based products. I think technology's going to play a bigger role in the hedge fund industry. Technology has pulled forward a number of theses that we thought it might play on the next five or 10 years, and fast forward them to today. Perfect example, look at how we're communicating between the three of us today with such ease. But I think technology will become a bigger part of hedge funds. And I'm not talking about AI and machine learning. I'm talking about greater efficiency in use of risk management, greater use in terms of operational efficiency, back office to front office.
Panayiotis Lambropoulos: (39:56)
I think technology will become a bigger part and should be embraced. It'd be used greater in due diligence. I can see more data rooms being opened. A lot of virtual visits becoming the norm and part of the due diligence process. I call it the humanizing of due diligence. I can see us binge watching a bunch of IDD videos as opposed to binge watching Netflix and we just hear what the manager's doing and saying, as opposed to reading the typical email DDQ.
Panayiotis Lambropoulos: (40:26)
In terms of strategies, I think ESG, impact investing is here to stay. And I think it will be a bigger part, of not just the general market, but I think portfolio investing and portfolio consideration.
Panayiotis Lambropoulos: (40:41)
And lastly, I think because alternatives are already a bigger part of portfolio construction, I think the modernization of risk of portfolio construction will probably improve. And what I mean by that, for example, right now we're still kind of stuck in your typical two moment portfolio mean variance optimization. Expect a return in standard deviation. We might have to add other moments in that portfolio construction, for example, a [inaudible 00:41:10] ratio, to consider a more optimal portfolio construction as we account for alternatives. So I think that's a few things that might change in the future.
John Darsie: (41:21)
Well Panayiotis, I think that's a great tour de force on the hedge fund industry. It's been a lot of fun getting to know you a little bit better over the last few months and comparing notes and hopefully we can get you to one of our live events once that becomes the norm. But for now, we'll settle with some fun Zoom conversations.
John Darsie: (41:37)
Anthony, you have the final word?
Anthony Scaramucci: (41:38)
No, that was a brilliant exposition of what is going on in the industry and I think you made a very compelling case to have that solid diversified asset allocation plan and what we're learning about markets, they're moving so fast, we're not going to have time to change our plan. And so I tried to tell the retail investors, some of which are on this Zoom call with us, everybody has a long term investment plan until they have short term losses. And then once they have short term losses, they start setting their hair on fire, running around in a circle.
Anthony Scaramucci: (42:12)
You made an amazing case for people just to stay disciplined and then the different buckets and I really appreciate you doing that and let's get you back at one of our live events soon.
Anthony Scaramucci: (42:23)
Thank you again.
Panayiotis Lambropoulos: (42:24)
Thank you and I appreciate the invite and hopefully the first event might be Dubai, I've never been.
John Darsie: (42:29)
Hey, [crosstalk 00:42:30].
Anthony Scaramucci: (42:30)
We're going to get you out there. We did a great even in Abu Dhabi last year, so, that's a deal. You're on.
Panayiotis Lambropoulos: (42:36)
Well, thank you again for the invite. Appreciate being part of the talk series.